WASHINGTON — Against the backdrop of tough hearings on the collapse of Washington Mutual in the largest bank failure in U.S. history, Sen. Maria Cantwell says there are signs that Congress and the Obama administration may finally be getting serious about Wall Street reforms.

The Washington state Democrat's comments came as the Capitol Hill fight over an overhaul of financial system regulations heated up with Democratic congressional leaders and the White House saying they were prepared to act with or without Republican support.

For months, Cantwell has been pressing to include stringent regulation of the currently unregulated $600 trillion derivatives markets. Last week, Sen. Blanche Lincoln, D-Ark., chairman of the Senate Agriculture Committee, proposed legislation that goes a long ways toward satisfying Cantwell.

"It looks to me as though Blanche is proposing a real stare-down of Wall Street," Cantwell said.

Senate Majority Leader Harry Reid said he may bring a bill to the Senate floor as early as this week, and Republicans were threatening to mount a filibuster.

Derivatives, which some financiers have called "financial weapons of mass destruction," have become a prime source of revenue for Wall Street investment banks. By some estimates, they generate $20 billion to $40 billion annually for the banks. Essentially, derivatives are side bets on whether the price of commodities like oil, natural gas or lumber or stocks and other financial instruments will move up or down in trading.

Cantwell has called the trading in derivatives "casino capitalism" and warned it could lead to another economic bubble that will burst unless reined in.

In a statement, Lincoln said, "The dark days of deals are over. Financial institutions will have to decide if they want to be banks or if they want to engage in risky financial trading."

The hearings on Washington Mutual, or WaMu, were timed to put pressure on Congress to act on a financial regulations overhaul. They capped an 18-month investigation into what was once the nation's largest thrift with more than $300 billion in assets, $188 billion in deposits and 43,000 employees.

The hearings offered an inside look at a 118-year-old Seattle-based thrift that jettisoned its "plain vanilla" approach to home mortgages for a high-flying "higher risk lending strategy," which produced shaky mortgages that were fed into the financial system like a "polluter dumping toxic substances into a river."

In testimony, WaMu's former chief executive, Kerry Killinger, sought to show his bank was gradually winding down its business in risky home mortgages in the months before its collapse. Killinger also testified that he thought federal regulators seized and sold WaMu prematurely, adding that he believed big Wall Street banks picked the winners and losers as the economy nosedived and for those "outside of the club," like WaMu, the penalty was severe.

In its frenzy to sell mortgages and increase profits, Levin said, WaMu employees steered borrowers to high-risk mortgages, routinely made questionable loans to people with below-average credits scores, ignored credit standards and in some instances engaged in outright fraud. Roughly half of the loans made by one WaMu subsidiary went bad.

Though senior management was aware of the problems, it did not to stop them and, in fact, offered incentives to loan officers who increased their volumes, Levin said.

At the same time, WaMu was packaging its risky mortgages and offering them to Wall Street investment firms, who in turn offered them to investors. The investment firms were also playing the derivatives markets with their mortgage securities.

"Mortgages began to be produced for Wall Street rather than Main Street," Levin said, adding that WaMu and other lenders created a "mortgage time bomb."

Last week's hearing was just the first as the investigations subcommittee will look at the role of the regulators and rating agencies in the WaMu collapse.

"It was a man-made economic assault," Levin said. "People did it. Extreme greed was the driving force. And it will happen again unless we change the rules."

Cantwell said WaMu's collapse has left investors and former employees, including pensioners, wondering what happened and why.

"Shareholders are wondering why Goldman Sachs was bailed out on 100 cents on the dollar and WaMu didn't get anything," Cantwell said.

The senator said Wall Street's appetite for mortgage securities fed the frenzy by banks like WaMu to offer more and more risky home loans.

"It allowed WaMu to go to town on this business," she said.

Cantwell has spent months lobbying her colleagues to include tough new regulations for the derivatives market.

Two Senate committees have jurisdiction over financial reform — the Banking, Housing and Urban Affairs Committee and the Agriculture Committee.

The Banking Committee oversees Wall Street and the banking community, while the Agriculture Committee oversees the derivatives markets, which initially involved commodity trading.

In a February letter, Cantwell, along with Democratic Sens. Dianne Feinstein of California and Byron Dorgan of North Dakota and Republican Sen. Olympia Snowe of Maine, asked Lincoln to crack down on the derivatives market.

In a return letter to Cantwell and the others, Lincoln said last week that she will seek "vigorous reform of these unregulated markets." In detailing her plan, Lincoln said she will require that derivatives traders have adequate financing in case their investments go sour and that all trades will be recorded. The Commodity Futures Trading Commission would be granted new regulatory powers and loopholes would be eliminated as a way to crack down on speculators, Lincoln said.

Cantwell said Lincoln's proposal was the strongest financial overhaul bill to emerge so far.

The Banking Committee has already approved its reform bill, with much of the focus on whether to create a new agency to protect consumers. Eventually the Banking and the Agriculture committee bills will be merged.

Though she reportedly has said she hasn't made up her mind on whether to support a financial reform bill opposed by virtually all of the her Republican colleagues, Snowe's interest in regulating the derivatives market was encouraging, Cantwell said.

"Snowe will be a player," Cantwell said.

Congress didn't act on financial reforms until four years after the 1929 stock market crash. Once President Franklin Roosevelt took office in 1933, Congress acted quickly. The action came as the run on banks accelerated.

Without the changes, Cantwell said another financial crisis could loom.

"Who knows what the next thing is they will cook up?" Cantwell said of Wall Street.

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